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Channel Conflict: Is Sony Going Too Far?

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Channel conflict is one of those internet buzzwords that unlike other cute transplants from the offline world has real and dire consequences for companies.

One company that's recently seen its share of channel conflict problems is Sony (SNE). A few months ago Sony angered its retailers by requiring them to sell Sony music label CDs that included hyperlinks to Columbiahouse.com - which Sony partially owns - and Sony's own Music store on the web (direct.sel.sony.com).

Were retailers angry? Of course. Retailers like Tower Records have been constantly under attack since the rise of music superstores, but now the threat of disintermediation became too much.

The result was an antitrust lawsuit against Sony by the National Association of Recording Merchandisers (NARM). The charge? The hyperlinks allowed Sony to get consumer's email and music preferences, and allowed consumers to bypass retailers without any compensation.

"I'm angry that after all the effort Tower puts into helping Sony artists, these links are being used to drive sales at Sony stores instead of at our stores," noted Stan Goman, Executive Vice President of Tower Records and Chairman of NARM's Board of Directors on the NARM web site.


Sony wasn't the only one doing this, since at the same time BMG was also beginning to explore selling direct to consumers and thereby bypassing their retailers.

SONY GOING AT IT AGAIN

Now Sony is doing it again. This time they're launching a new web site called SonyStyle.com. Included in the new site's offering will be many of the consumer electronic products that Sony traditionally sells through their expansive list of retailers.

What makes this interesting is that according to the Industry Standard, Robert Ashcroft, president of Sony e-solutions services, apparently doesn't envision potential channel conflict with this strategy. His argument is that the new site benefits all channels since there will be a dealer locator search engine on the site.

Academic research, however, indicates that channel conflict will remain. The reason is based on an idea I first wrote about in an article on Customer Relationship Management (CRM), but is applicable here as well.

You can see the central idea in the words of Stan Goman above. Simply put, channel conflict occurs when one party perceives they're putting more into the relationship than the other; in other words, not being rewarded for a good effort. As an academic, our job is create fancy names for these situations, and in this case it's called "asymmetric dependence."

In my opinion, Sony is creating a situation of asymmetric dependence. If I were a retailer I would see my good efforts to sell Sony's products not being rewarded by Sony going around me to my customers.

I predict the result is going to be the same that Compaq (CPQ)faced when it tried to go direct. There, retailers perceived that Compaq, by going direct, was explicitly not rewarding them for being conscientious retailers. The result - channel conflict.

WHY DO COMPANIES CREATE CHANNEL CONFLICT?

I have talked with many companies about channel conflict and it never ceases to amaze me how easily they fall into situations ripe for this problem. Why?

For one, companies like to emulate other successful companies and forget that their situation is different. Compaq's lust after the success of Dell's (DELL) direct business model is an example, but Dell never had a dealer network like Compaq.

Other companies become so focused on the customer - which is a good thing - that they forget the needs of the retailers. Or they just get wildly caught up in the enthusiasm about the disintermediation craze. Often they just obliviously walk into the situation.

The result is that they end up competing with their customer - in Sony's case, the retailer.

CHANNEL CONFLICT ISN'T INEVITABLE

Of course, companies like Sony that have existing retailers but are trying to sell on the Internet don't always have to have channel conflict. Other companies have avoided this by selling distinctly different products through the net than through the retail outlets.

But this doesn't seem to be Sony's strategy. Again, according to the Industry Standard, Robert Ashcroft says the goal is to make available Sony's entire line of goods, totaling about 2,000 items. The web site is supposed to be "a platform for all connected devices" produced by Sony.

Sony could make this work if they sell their products at a price premium on their web site, thereby making it cheaper to buy from a retailer, but I doubt this is their plan. The net is currently not the place to compete with premium priced products.

Finally, the proposed dealer locator search engine is a weak gesture since it is likely to promote free-riding. Look at how easy it will now be for consumers to find a local retailer to physically check out a product and then hop back to the new Sony site for a nice discount price.

RETAILERS DON'T HAVE TO TAKE IT

When Sony formally launches the web site their retailers don't have to take it lying down, and I imagine we will start to see retailers looking for ways to lower their dependence on Sony.

For example, they may actively seek new products to carry that compete with Sony, or subtlety, if not overtly, push consumers toward competing products of Sony. Or they will actively pursue similar online strategies of their own to compete with Sony.

In any event, channel conflict will often continue until something is resolved. We'll have to wait and see how Sony and its retailers will handle it. But it shows how difficult it is for bricks and mortar companies to turn into bricks and clicks when they have historically sold products through loyal retailers.

Channel conflict and its effects are likely to be the core reason why the future of the net could belong to only the pure net plays and the companies who own their distributors. Everyone else could be stuck in the middle with anger, lawsuits, and violated expectations.


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Allen Weiss is the founder and publisher of MarketingProfs.com. He can be reached at amw@marketingprofs.com.

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